AxoGen, Inc. (AXGN) Q2 2019 Earnings Report, Transcript and Summary

Greetings. And welcome to the AxoGen’s Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question–and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host Kaila Krum. Thank you. You may begin.

Thank you, Diego, and good afternoon, everyone. Welcome to AxoGen second quarter 2019 financial results conference call. We appreciate you joining us. I'm Kaila Krum, Vice President of Investor Relations and Corporate Development. With me on the call today are Karen Zaderej, Chairman, Chief Executive Officer and President; and Pete Mariani, Chief Financial Officer. The format for today's call will be as follows. First, Karen will discuss 2019 second quarter highlights and review our full year financial guidance. She will then turn to our key operational and strategic objectives. Next, Pete will then provide details on the financial results outlined in today's press release. We will then open the call for your questions. Today's call is being broadcast live via webcast, which is available on the AxoGen website. Within an hour following the end of the live call, a replay will be made available in the Investors section of the company's website at www.axogeninc.com. Before we get started, I'd like to remind you that during this conference call, the company will make projections and forward-looking statements regarding future events. We encourage you to review the company's past and future filings with the SEC, including without limitation the company's Form 10-K and 10-Q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward-looking statements. These factors may include, without limitation, statements regarding product acquisitions and/or development, product potential, the regulatory environment, sales and marketing strategies, capital resources or operating performance. And with that, I'd like to turn the call over to Karen Zaderej. Karen?

Thanks, Kaila, and good afternoon, everyone. Second quarter revenue grew 30% to $26.7 million. We're pleased with our continued growth and the progress we've made in strengthening our commercial execution. Sales in the quarter came in at the low end of our annual guidance range due primarily to delayed productivity growth. As a result, we're updating our guidance for the year to reflect this current run rate. We now expect revenues will be in the range of $106 million to $110 million, representing growth of 26% to 31% for the full year. We now have 100 direct sales representatives and expect to continue to grow to at least 115 by the end of this year. The new reps allows to split larger territory, add clinical sales specialists and convert independent agency territories to direct. We've increased the number of direct reps by 40% and our direct business now represents 87% of our revenue versus approximately 80% one year ago. Our direct coverage is much improved over the prior year, with smaller, more dense territories, which we believe will drive productivity improvement as the structure matures. These are important and strategic initiatives that will allow us to continue to drive long-term sustainable growth in the developing market. We're the leading company solely dedicated to restoring quality of life for patients suffering from peripheral nerve damage. Our purpose-driven team of professionals works with skilled clinicians to further our mission to deliver life-changing evidence-based solutions to better serve its patient population. We're advancing this mission through the pursuit of our strategic initiatives, which we refer to as our five pillars of growth, building market awareness, educating surgeons and developing advocates, growing the body of clinical evidence, executing on our sales plan and introducing new products and expanded applications in nerve repair. I'll now comment on our progress in each of these areas. First, we continue to build market awareness of AxoGen in our products by engaging with patients and surgeons. We are growing clinical awareness of our products and nerve repair algorithm within the surgeon community. In the quarter, we've participated in the 2019 meeting of the International Federation of societies for surgery of the hand a clinical conference to hand surgeons from around the world. There were 10 scientific presentations related to AxoGen's products. In addition to these presentations we hosted two educational symposiums focused on optimizing outcomes by utilizing AxoGen's peripheral nerve repair algorithm. These symposiums were highly attended and provided increased awareness of clinical evidence supporting the use of our portfolio of nerve repair products. Our second pillar of growth is focused on surgeon education and the development of surgeon advocates. We conducted seven national education programs in the second quarter, including one Fellows program. We're also growing the number of educational programs specific to our specialty applications including OMF and breast reconstruction. The surgeon led events focus on advances and best practices in nerve repair with participating surgeons gaining confidence in nerve repair techniques. On average, we see Axogen product utilization from surgeon attendees more than double in the six months after they attend the program. In 2019, we plan to conduct a total of 25 national education programs, including six Fellows programs. We remain committed to training the next generation of neurosurgeons and expect to train three quarters of all hand and microsurgery fellows this year Our third pillar is to grow the body of clinical evidence. Recently, we announced the publication of the 100th peer-reviewed paper featuring results from clinical studies involving our product portfolio, an important milestone for Axogen that reinforces our ongoing commitment to advancing clinical evidence and peripheral nerve repair. Favorable results have been replicated across both sponsored and independent investigator initiated studies evaluating our technology. With more than 10 years of comprehensive clinical evidence demonstrating positive outcome, we are seeing growing surgeon interest and acceptance of the Axogen portfolio of products. We will continue to sponsor clinical research where we believe we can make a meaningful difference. In late April, we provided an update on RECON, our Phase III pivotal study to support our BLA for Avance nerve graft. This prospective randomized controlled double-blinded study compares Avance Nerve Graft to synthetic conduits. Specifically, we announced the completion of the blinded interim analysis and our plan to expand enrollment by 50 subjects to support the original power of the study. Over half of our study sites have now been reinitiated and are actively recruiting study subjects and we're in the process of selecting and onboarding up to five new centers. We started the enrollment of additional subjects and continue to anticipate we will reach our goal of 220 subjects by the end of summer 2020. Our RANGER registry has now enrolled more than 1,800 Avance Nerve Graft repairs and continues to provide significant new evidence in the management of nerve injuries. Data from the registry continues to demonstrate meaningful recovery treating a variety of nerve injuries and gap lengths. The data demonstrates the ability to restore sensory and motor function and shows positive outcomes while eliminating the donor-site comorbidities associated with autograft. Surgeons are using this clinical data to better understand nerve repair outcomes and to expand their treatment algorithms. We also continue to enroll the MATCH study, which is a contemporary cohort control within the RANGER study that provides reference controls for nerve autograft and synthetic conduits from participating registry centers. We expect data from this study will be presented later this year. Additionally, we continue to enroll subjects and build clinical evidence in the Sensation Neurotization Outcomes for Women, or Sensation-NOW, clinical registry. We believe the data from this registry will demonstrate that the Resensation technique provides meaningful recovery of sensation and improved quality of life for women who choose neurotization along with their flat reconstruction following vasectomy. In 2018, we initiated our REPOSE clinical study. REPOSE is a prospective, randomized-controlled study evaluating the use of AxoGuard Nerve Cap in the management of painful neuroma as compared to a standard neurectomy procedure. REPOSE is a two-phased study, consisting of 15 subject pilot and an 86 subject pivotal phase. We have completed enrollment of the pilot, and we've initiated enrollment of the pivotal phase of the study. Recently, we have also begun enrollment in our ASSIST clinical study. ASSIST is a cohort study that evaluates the use of Avive Soft Tissue Membrane as compared to a non-treatment control in non-transacted acute traumatic nerve injuries. This study will enroll over the next several years and includes a one-year follow up. Our fourth pillar is sales execution. We continue to grow and refine our commercial capabilities across our three core nerve repair applications. We ended the quarter with a total of 100 direct sales representatives, an increase of seven in the quarter and 28 over the last 12 months. We ended the quarter with 19 independent agencies. We have converted certain independent territories to direct territories, as well as adding new agencies. We expect to continue to add agencies in select geographies. With an expanded sales footprint, we've been able to reduce territory size and we believe this will create efficiencies for our direct sales team, allowing them to drive deeper penetration in our current active accounts while also adding new active accounts. In the second quarter, our number of active accounts increased 20% to 762, up from 634 in the second quarter of 2018. We define an active account as an account that has typically gone through the committee approval process as at least one surgeon who has converted a portion of his or her nerve repair algorithm to the AxoGen portfolio and has ordered the AxoGen products at least 6 times in the last 12 months. Our objective is to continue expanding the treatment algorithms of surgeons to include all surgical implant products across our full continuum of nerve repair. This is important because accounts ordering at least three of our four nerve repair products generate more than six times the revenue of an account ordering just one of these products. Our fifth pillar of growth is the introduction of new products and expanded applications in nerve repair. We are making investments in opportunities to innovate our product portfolio and to expand the application of our nerve repair products to address the many unmet needs in the surgical repair of peripheral nerves. In November of last year, we announced several foundational initiatives planned for 2019 to help support a broader introduction into the surgical treatment of pain. A nerve repair application, we believe, could expand our total addressable market. As we've discussed, one of the sources of chronic pain following traumatic injuries or orthopedic procedures is a symptomatic neuroma. Surgeons can surgically remove the neuroma and repair the resulting nerve injury using our products. As we explore this market opportunity, we see significant surgeon interest in treating this under-served patient population. Before I turn the call over to Pete, I want to reiterate that I'm pleased with our progress as we continue to execute against our strategic initiatives in a large and developing market. I'm confident we're building strong capabilities to drive long-term sustainable growth across an expanding set of nerve repair applications. Now, I'll turn the call over to Pete for a review of our financial highlights. Pete?

Thanks, Karen. Second quarter revenue grew 30% to $26.7 million. Revenue growth was primarily the result of increases in unit volume as well as the net impact of price increases and changes in product mix. As in prior quarters, our revenue growth was largely driven by increased revenue in our active accounts and the addition of new active accounts. We had a net sequential increase of 31 active accounts in the second quarter and now have 762, an increase of 20% over the prior year. We also continue to see growth in our pipeline of new accounts as surgeons become more familiar with our products and begin to incorporate them into their treatment algorithms. Gross profit for the second quarter was $22.5 million, a 29% increase compared to Q2 of '18. Gross margin was 84.1% for the quarter compared to 84.9% in the prior year second quarter. Total operating expense in the second quarter was $13.1 million, up 35% over the prior year. The increase includes investments in our expanding commercial capabilities as well as higher investments in clinical, R&D and general and corporate expenses associated with our growth. Operating expenses also include non-cash stock compensation expense of $2.7 million in the second quarter compared to $2 million in Q2 of '18. Sales and marketing expenses in the second quarter was $18.5 million, up 32% over the prior year. As a percentage of revenue, sales and marketing expense in the quarter increased to 69% compared to 68% in prior year. Research and development spending in the second quarter was $4.3 million compared to $2.6 million in the prior year. Our increased investment in R&D includes additional clinical and product development programs, as well as expenditures supporting our BLA for our advanced nerve graft. As a percentage of revenue, R&D expense for Q2 was 16% compared to 13% in the prior year. General and administrative expense in the second quarter was $7.4 million, up 30% over the prior year. The increase includes higher compensation expenses, including higher non-cash stock compensation and litigation and related costs. As a percentage of revenue, G&A expense in the second quarter was 28%, which is consistent with the prior year second quarter. Net loss in the quarter was $7 million or $0.18 per share compared to $7.4 million or $0.20 per share in the prior year. Excluding the impact of non-cash stock compensation as well as litigation and related charges, adjusted net loss and net loss per share in Q2 was $3.7 million and $0.10 per share compared to $3.2 million and $0.09 per share in the prior year. Adjusted EBITDA loss in the quarter, which also excludes the impact of stock compensation, litigation and related charges, was $4.1 million compared to an adjusted EBITDA loss of $2.6 million in the prior year. On our balance sheet, we ended the quarter with $109.1 million in cash, cash equivalents, and investments compared to $113.8 million at the end of the first quarter. And now turning to guidance, as Karen mentioned, we are updating our 2019 revenue guidance to be between $106 million and $110 million. We continue to expect gross margins will exceed 80%, and additionally we expect to have at least 115 direct sales reps by year-end, consistent with our prior comments. In the second quarter, we continue to make significant investments to build a foundation for long-term sustainable growth. We will continue to invest in our commercial team and broader capabilities, but we are pleased with the moderation of spending growth that we saw in the quarter. And with that, I'd like to hand the call back over to Karen.

Thanks, Pete. AxoGen remains the leading company solely dedicated to improving quality of life for patients suffering from peripheral nerve damage. We believe that we are building a foundation based in science and clinical outcomes that will allow us to address these important unmet clinical challenges. We are confident that the underlying fundamentals driving our business are strong, and we believe that the continued execution of our strategic initiatives will deliver long-term sustainable growth. As many of you know, big part of the AxoGen family lives and works in the Dayton Ohio area. While our employees and their families are safe, our prayers and deepest sympathies are with the El Paso and Dayton communities during this challenging time. I love to thank our investors for their ongoing support and the AxoGen team for their commitment to our values and vision to revolutionize the science of nerve repair. Before taking questions, I'd like to end our prepared remarks by featuring a patient whose quality of life was improved by a nerve repair using the AxoGen algorithm. Don is a patient from here in Central Florida. He is a fitness enthusiast and an engineering student who loves dogs. One afternoon, he heard his dog in distress in the backyard and he ran to check on them. Unfortunately, he slipped and fell through his glass patio door badly injuring his hand and arm. The damage left him bleeding significantly and unable to feel or move his hand or fingers, but he was able to call 911 using theory. As he waited for AMS to arrive, all Jon could think about was whether he'd ever be able to lift weights and have an active lifestyle again. Dr. Nirav Gupta discovered Jon had suffered severe laceration and that both his median and ulnar nerves were transacted. The median and ulnar nerves control motor function and sensation in the wrist and hand. This median nerve was repaired using advanced nerve graft and his ulnar nerve was repaired using Axoguard nerve connector. As I fast forward to today, I'm proud to report that Jon has experienced the return of both sensation and motor functions hand and arm. He's completing his engineering degree and has returned to lifting weights and his active life style. We encourage you to visit our website to see more of Jon's story. At this point, I'd like to open up the line for questions. Diego?

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instruction] Our first question comes from Richard Newitter with Leerink Partners. Please state your question.

Hi. Thanks for taking the questions. Karen and Pete, I was hoping maybe we could just start off with, guidance I appreciate that. The quarter came in towards the low end, you're at low end year range, but maybe you could just keys out for us. What exactly it is being delayed by productivity gains and what gives you kind of visibility into, I guess the future productivity contemplation that you have in your guidance for the back half that this is the right range. It feels like productivity and sales force related issues have kind of made a little bit challenging to forecast the business. So help us understand what's contemplated in your guidance in the back half, maybe even between the third quarter and the fourth quarter. What exactly led to the delays and what gives you confidence that you have visibility into the back half and for the new full-year target? Thanks.

Sure. Thanks, Rich. So, we've demonstrated that as you take these territories and make them smaller and more geographically dent [ph] so we can generate both better productivity and high growth in those territories. And that's what we're looking to replicate across more metropolitan areas. At the same time, we're taking some of the geographically diffuse cities and moving those to independent agencies. So there is some moving pieces in both geography and our presence of revenue to make these changes happen. We see that as a strong footing and platform for continued long-term growth. The transition, if you looked at our original guidance, was that we would remain flat. We see the -- productivity has remained relatively flat with our direct reps, and we've not seen the uptick that we expect to see -- that we would originally hope to see in the full year, but we think it's a timing thing. Because as we look back at territories that we've done this previously, we do see how they come up when you give that good concentration allowing the reps to focus. And just from a practical matter, you can see how that would happen in that it reduces driving time for the rep, they're not driving out to cover a trauma case that might be five or six hours from their house, instead they are focusing on the territory on the high value accounts or are close to their home where they can spend more time and having better touch points with their surgeons so that we don't lose surgeons during their wait period and we can continue to drive penetration in those accounts.

Okay. And then, just to be clear, what exactly -- what rep productivity assumptions are embedded in the back half? And can you maybe give us a sense as to when in the year you think we should expect for modeling purposes between 3Q and 4Q to start seeing that bottom and then maybe start to improve? Help us think about the cadence between 2Q and 4Q? Thank you.

Yeah, Rich. So, the way we think about it is, as we look at where we came through in the first half with sales rep productivity at the low-end of the range of our original guidance. We looked at this and said, what is the current run rate or at the top end of the range. And we set some additional conservativeness around a range of outcomes that could be below that if for whatever reason we had some pullback in productivity as we continue to move some things around. So, we've said, the current run rate at the top end of the range, and I think that's it gives us, and I hope investors’ confidence that we've got a range that makes sense for us right now, and that that should define where we go through the back half of the year. When it comes to the Q3, Q4 split, again, I think if you look at where we ended second quarter and apply historical seasonal patterns, that's the way we've looked at it. And I think that would be the right way to go as we think about the rest of the year.

And if I...

Yeah. And I guess, so what we're saying is that the current run rates at the top end range, if we see that pick up towards the back end of the range, that puts us in a better position.

Right. And maybe just, if I could, one more. As we take a step back. I just think about what the normalized projected growth rate of the company is, you're now in the, call it, 26% to 30% range for 2019. When you come out on the other side of the productivity curve presumably assuming it all goes to plan, how do you view the longer-term growth profile of the company?

Are you now at 25 plus percent growth company? Has anything changed in the end markets or the size of the markets? Thank you.

No, nothing has changed in the fundamentals of the market. Nothing has changed in the size of the market the way we look at it. This for us, we continue to see ourselves as a premium growth company. Like Karen mentioned earlier, we've grown our sales reps by over 40% over the last year. We're splitting territories. We're adding clinical sales specialists we're creating a much better footprint especially across the larger metropolitan areas. And I think we're doing the things that are going to allow us to continue to be a premium growth company going forward. But from where we're sitting right now, I think this updated range is appropriate based on where we are coming through the first half of the year and we'll see how things develop in the back half

Thanks.

Our next question comes from Raj Denhoy with Jefferies. Please state your question

Hi, Karen; Hi, Pete. I guess, maybe following up on our last line of questions, I'm curious why you think the productivity is perhaps taking longer to ramp with these new sales reps relative to your original expectations? Is there anything different in the market, I think, from a competitive standpoint or just really what's kind of slowing that progress for these new hires?

Yeah. So first, there is nothing that we see that any difference in the place from a competitive standpoint, there is no new entrants, there is no change in competitive levels of market attention. And as the market is growing, that growth is really coming from the things that we AxoGen are doing to build the nerve repair market - nerve care market. So no market dynamics other than the ones we create, which are that we are bringing awareness to nerve repair and helping to teach surgeons and algorithm a repair that we think we will yield optimum results for patients. In terms of the productivity, I think it is -- we are coming in at the lower end of our rang. It's is not an unexpected range, l we're coming in at the lower end of the range. We're not seeing the pop up. We could see at a higher end so, we've always talked about how there is a productivity range we're reps come kind of come in between the nine to 12 months and we're just seeing things run on the longer end. And so we felt it was prudent just to reflect that.

That's fair. And I suppose part of this dynamic you kind of prepared for this, but you're adding a lot of -- a few more junior reps and I guess I'm curious what's happening at the other end, right, so reps that have been tenured now for a period of time. What are you seeing in terms of productivity of those folks are or is there any maybe just trying to figure out and get a gauge for where productivity could go over time? I mean is it still improving even with some of the more tenured folks or what are you seeing broadly?

Yeah. So, we're still seeing the same dynamics in the marketplace with the more tenured reps. We have, like we talked about before as territories get to $2 million, we will split those territories. Sometimes I'll split them two for one, sometimes well split them three or four, underpinning on where they're at, and we have many reps who are crossing that level. In fact, we've got something above it. And it's okay to keep them about it for a little while based on their specific territory. So, there is nothing here fundamentally about the business and the ability of these reps to continue to drive growth. I think, as Karen mentioned, this is really about this broader better organization beginning to mature in its current setting. And we continue to be optimistic about where this could develop.

And just to add, I think, we run some of these scenarios where we really looked at what we think the macro potential of the territories are and when we've added this more concentrated territory. We see very solid results and that's what we're looking to replicate across the country. So this is something that we've demonstrated and now we're looking to expand that demonstrated approach in more geographies.

That's great. And then, just quickly, Pete, you mentioned price -- you took a little price in the quarter. Can you give us more around what that was, what that contributed?

Yeah, we continue -- we expected a mid-single digit net price increase, and that's what we're continuing to see.

Okay, great. Thank you.

Yeah.

Our next question comes from Ryan Zimmerman with BTIG. Please state your question.

All right. Thanks for taking the questions. Just to continue to follow-up. Karen, you're talking about this territory realignment and going deeper in territories. Where are you in that transition process? So, are we on the front end of that what's the timeframe for that transition? And then I have a follow-up as well. Thank you.

So we see this as an evolution, not a revolution and changing the market. So, we've said we'll have at least 115 direct reps. Those will be spread over Q3 and Q4 we're not trying to bunch the law all at one time. So - and that will be reflected just like we've done in the earlier part of the year where we did some reps in Q1 and some reps in Q2. So you'll see a continued change as we continue to increase our sales team

All right, okay. And then just a follow-up similar line of question. But as new accounts come online, maybe you can characterize them or talk about them. Are you seeing similar levels of productivity in those new accounts? Or are they more marginal users and maybe just characterize kind of where you are previously with accounts as they came online six to 12 months ago maybe what you're seeing now in the account and if there is any difference between changing groups?

So when an account start is usually is very small. It's one surgeon using one product in one portion of his or her treatment algorithm. And as we talked about, we really see the momentum when they start to adopt the broader range of our algorithms, it's more than six times, our revenue in an account using three of our implants versus one, right. So it's not a one to one relationship, it really is a broader adoption of the algorithm. And if I look at those accounts that have three or more products today. The growth rate and the revenue generation is it's higher and faster than it was historically. So we see that as positive. That doesn't mean that it happens all at once. We still go through these stages of adopting the first product, in fact the surgeon trialing. The first product, waiting to see outcomes from that first product and adopting that first product and then starting to expand of the second and third product as they expand the applications that they approach in nerve repair. And that is still, in my experience, nerve care is a slower adoption period -- a slower adoption pass than many other surgical areas because of the time to get outcomes, it's much longer and nerve repair than it would be for a fracture, for example. And so that part we don't see changing. But once we get into it, we don't see also a degradation of that adoption. We don't have marginalization of the potential of the accounts that we're moving into.

Okay. That's very helpful. I'll hop back in queue. Thank you.

Our next question comes from Craig Bijou with Cantor Fitzgerald. Please state your question.

Good afternoon and thanks for taking the questions. Karen, maybe I guess I have a couple of follow-ups or clarifications. Karen, you talked about some of the moving pieces and the territory splits. So, I guess, I want to get a sense for -- are those -- were those changes that maybe weren't contemplated earlier in the year. I know you've given the guidance or you have given the guidance about adding reps so we knew this was coming. But I guess maybe with some of the sales force leadership changes. Were there any things that happened in Q2 or maybe additional splits that weren't contemplated, say, at the start of the year?

Our attrition rate has not changed with the addition of the sales leadership. In fact, I think the sales team has rallied well now behind our new sales VP. And we continue to execute on the plan that we've had in place. So no, we've not seen that. As I've said before, we do a focused performance management approach and we would expect to see 10% to 15% attrition in the year and we're tracking in that range.

Okay. And then maybe another one on the rep productivity, and I just want to make sure that I'm clear because I believe that most of the growth this year was going to come from the reps that were more mature. And I know that the delayed productivity growth. I guess I'm just trying to understand was that productivity slowdown more focused in reps that have been there over a year was it, you didn't see the impact or any impact from some of the newer reps. I know you've gotten a couple of questions on it, but just maybe a little bit more of a clarification on exactly where that delay, like what group that delay came from?

So, we see, - I would say, the original assumptions were that the growth would be from 85 reps. That we had at the end of the year with modest contributions from the new reps that we've hired and as we talked about before. New reps as they come on in the first year, we've assumed a very a modest growth for all the reasons I talked about in terms of the conversion process of surgeons. And so, if I look at the reps over time, I would say that are more tenured reps I have actually grown a little better then, we expect the reps that sort of a one-year to two year have grown a little worse than we expected and the reps that have been our recent hires have done actually on a percentage basis a little better, but still very small numbers, because they do contribute a very modest approach. So I would say it's a mixed bag. It's not something that I think is a substantial trend.

Thanks. Got it. Go ahead.

Yeah, I think that some of this. It's not so much specific as it is just the geographies that we're putting folks in and giving them a chance to get rolling and they're get introduced to get going and get up to speed. I think we've got a great team. I think we've added tremendous training for our folks. I think the way we're putting the sales reps through training and updating that training on a regular basis; I think it's gone extremely well. And I think the team is positioned very well. This really is in our view moving along well just at the lower end of the range at this point and we'll continue to see how things develop in the second half.

And just a reminder in when I talked about the 85 reps, we ended 2018 reps and 25 and those were hired in 2018 with some of them, certainly in fourth quarter. In fact, nine of them were in the fourth quarter. So those folks are still coming up the productivity curve. As well as the people that we're hiring this year and that's the balance that we're trying to look at is continuing to maximize the productivity of the people that we had in place last year as well as, again the new hires we're doing now.

Great. Thanks for taking the questions.

Thank you. Our next question comes from Josh Nemers with William Blair. Please state your question.

Hi, good afternoon. This is actually Andrew Brackmann on for Brian Weinstein. Maybe just piggybacking off of the previous line of questioning there. As it relates to the new leaders sort of brought into the sales organization, can you talk maybe a little bit more about the specific changes they've brought to the commercial team and how is that being received by the reps in the field? Thanks.

Yeah. I think, Chris and supported also by Eric have done a really good job of first coming up to speed on the execution of the strategy that we have in place. The fundamental strategy has not changed. But I think they've done some very good fundamental that has helped to reinforce the plan that we're on. For example, one of the things that I think the team has done a great job is really laying out and standardizing what is our hiring criteria for new sales associates as we continue to expand the sales team. Obviously with the growth we have this year, that was a really important criteria that we get in place, and they did a nice job of benchmarking what are the best of what we hired where we've seen the best growth in development to try and set these people that we're hiring up right. We're hiring now for the best possible growth, really again impacting 2021 -- or excuse me, 2020, next year, but we think we're bringing on a very strong class of people who will have the best potential for success. So they've done a nice job of standardizing there. The goal is to put it I think the best training program that we've ever had, both for our management and our sales associates in both the way we're delivering it and the messaging that we're delivering to educate the people that we're bringing on board, so again trying to maximize the opportunity for them to ramp up quickly. And so they've put a good emphasis on those two things that I think set us up for the long term with strength.

Okay, thanks. And then, just one point of clarification, I want to go back I think to something that you said around sort of the sales force sort of territory splits throughout the year, was that contemplated as you enter 2019 or is this a new strategy that's being put in place? Thanks.

Yeah. That's - we've actually done this for a number of years. As we've grown, we have been splitting our territories such that when we are in the range of $2 million, we will split the territory. We set up a compensation plan that rewards and recognizes growth and as a territory gets larger. It is often harder to get the gross dollars out of it. So, it ends up being a good win-win. And that the rep will make more money. With a smaller base and the company also wins because we go back to a good growth rate. And we've seen this over and over again. As we split the territories, they continue to then boost up with a better growth rate as the reps are able to focus their time and attention. And then, as part of the thinking that allowed us to then again pilot and several geographies, the focus on these smaller and more directed territories and has also had us then move to some of the changes that we've done in our independent agencies, where we have taken geographically diffused areas. Fresno California is a good example. Good trauma centers, good area for it to have some focus but geographically removed from other areas, and we don't want our rep driving out there. And moving that to an independent so well. Our independent - the revenue that is from independents has gone down from 20% down to 13%. We've actually increased our number of agencies with this idea that will help us improve our overall efficiencies.

Thank you.

Our next question comes from Kyle Rose with Canaccord. Please state your question.

Great. Thank you very much for taking the question. I just got one. I mean, when you talked about expanding the sales force, you also talked about investments in specialty reps. Just wondering if you could talk about, I guess, how many reps you've actually specialized towards some of the smaller markets, or at least smaller more growing markets OMF and breast in particular? And then, just kind of how those markets are tracking relative to your expectations and how we should think about them as a contribution to the overall growth? Thank you.

Sure. Well, again, just as a grounding, our largest opportunity and our biggest dollar area is in the traumatic injuries. And so that's the foundation of what we have as a business, but we recognize the number of years ago that there was opportunity in the oral and maxillofacial segment. So these are either mandible reconstruction or angiogenic injuries and dental procedures that damage the nerves. And then also, in breast reconstruction neurotization. And so, we've put in place two specialty teams focusing in on this. They work in conjunction with the area manager, so the territory manager, the specialty team for OMF is six people across the country -- excuse me, eight people across the country. And then in the breast team, we focus on selected centers, about 30 centers that really specialize again in breast neurotization, and we have six specialists to support those 30 centers. In addition, again to the area manager and those are included in our rep count

Great, thank you very much. Thank you. There are no further questions at this time, I will turn it back to Karen Zaderej for closing remarks. Thank you.

Thank you, Diego. Well, I want to thank everyone for joining us on today's call and we look forward to seeing many of you at the Canaccord Conference this week and at the Morgan Stanley and Cantor conferences in the coming months. Additionally, we'd like to announce we'll be conducting our Analyst and Investor Day in New York City on November 25th. More detail about this event will be made available on the AxoGen website in the coming months. Thank you.

Thank you. This concludes today’s conference. All party my disconnect. Have a great day.